US
US-China trade issues, with the US imposing hundreds of billions of tariffs on Chinese imports, and China responding accordingly, have been a major concern for financial markets over the past 18 months with threats to global trade and the world economy plus fears of a rise in protectionism.
Over the last few months, talks around such issues between the two powers have eased market concerns and this week ‘Phase 1’ of a trade agreement has been signed by both powers. Although the agreement falls far short of Trump’s initial demands, it does remove the downside risk of a never-ending escalation of tariffs by the US and China on each other’s imports and paves the way for further negotiations. The news help US stock markets achieve new all-time highs.
US Interest Rates
The key ‘Fed Funds’ rate is at 1.50%-1.75% having been lowered (3 x 0.25%) last year as the Federal Reserve responded to a slowing world economy on trade war concerns. It is expected the ‘Fed’ is going to have a much quieter year this year with regard to interest rate changes.
US Yield Curve
The US Yield Curve shows the difference between short and long-term interest rates. It spent a lot of last year in a ‘flat’ shape as investors were pessimistic about robust long-term economic growth and associated higher interest rates. At its worst the difference between the yield on the 2-year US Treasury note and the 10-year US Treasury note was -5.3 ‘basis points’ i.e. -0.053%. The gap last week was back to 33 basis points indicating investors feel more positive about future long-term growth.
Europe
Equities remain around 4-year highs with economic growth still fragile and perhaps look fully valued.
UK
Economic growth remains fragile in the UK and the market believes the next move in the 0.75% base rate could be down. Brexit trade talks will be a focus this year.
Iran
The killing of a top military commander in Iran provided a short upward boost to both oil and gold as might be expected but tensions in this region seemed to have eased and gold and oil prices have slipped back accordingly.
Summary:
Global equity markets in good shape.
Economic growth still modest around the world although healthy in the US at 2% and very healthy in Asia at 5%.
Inflation still low around the world and below most central bank’s 2% target.
Iranian tensions subsiding.
US-China trade talks going well. Phase 1 signed.
US Yield Curve now upward sloping.
US economy enjoying a ‘Goldilocks scenario’ – not to ‘hot’, not too ‘cold’ and financial markets like this. What could go wrong!
